Putin Preaches Energy Security

In a recent news report President Putin of Russia defends current pricing of natural gas. One expects self-interest to play roles in the voicing of opinion by country leaders. But really, invoking buyer energy security to support the Russian position is rather specious. Russia dominates gas supply to most of Europe, especially southern Europe. Countries such as Greece are completely dependent. Their energy security would be enhanced by alternative sources not increased reliance on Russia.

Putin was defending two different, albeit related, Russian stances. One is the need for take-or-pay long term contracts. Expensive pipelines require these to justify the investment. Not indefinitely, though; after the amortized lifetime the argument is weak.

The second issue, pegging the contract terms to the price of oil, is indefensible. Back in the days when oil and gas had pricing parity on the basis of energy content, this made sense. Today, with oil anywhere from twice to five times more expensive than gas, pegging to oil gives the gas producer an advantage. It creates absurd situations such as in India, where imported LNG, pegged to oil, is priced at over $15 per MMBTU, while domestic producers are allowed to sell gas for only $4.20. Furthermore, all current models indicate that gas price will rise modestly compared to oil prices. In Europe, gas contracts probably ought to be pegged to landed LNG prices, this being the only serious alternative to Russian gas.

Vikram Rao

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§ One Response to Putin Preaches Energy Security

The markets have taken the Russian oil/gas linkage and shredded it. 25% of all natural gas contracts traded in Europe today are open market trades, typically through Holland’s exchanges. The Russian ‘take or pay’ contracts are being replaced as quickly as they come due – or simply being ignored. Natural gas from Qatar, Indonesia and Australia is rapidly replacing the Russian bear hug. In 2015, US imports will stagger the Russian bear in his tracks.
The real challenge in European energy pricing lies to the left: Coal is cheaper to burn than gas for power generation. Not only does this hurt the environment (in the forward facing eco-continent of our forefathers), it misalocates resources and capital. Carbon pricing is deranged, utilities buy unused power at set piece pricing while whole forests in Canada and North Carolina are cut down and turned into pellets fr the new wood burning mega furnaces of a Europe gone mad.
Worry less about Putin’s pitiless pricing parody, more about Strasbourg’s simpering to the environmental Stasi. The European energy market is rigged to solar and wind ala Don Quixote. The only problem with Russian pricing is that the gas has to come from somewhere to run the power plants when the sun doesn’t shine and the wind is quiet.
The path to hell is paved with good intentions, or, as my good friend The Red Queen says, “I can think of six impossible things before breakfast!”